Await Friday’s PPI, retail sales reports

RachelKoning

Still, participants were looking ahead to Friday for a vital piece of the economic puzzle in monthly retail sales and wholesale price reports.

The Labor Department reported that import prices jumped 0.8 percent, but only because of the high cost of energy. Without oil, import prices were flat in June. Also released Thursday, first-time benefits requests for unemployment insurance rose 27,000, although the gain could be a temporary effect owed to summer layoffs at auto plants for retooling, economists suggested. Read related story.

A benchmark 10-year Treasury note rose 8/32 at 103 8/32, with its yield down 3 basis points at 6.04 percent. The 30-year bond rose 15/32 to 105 21/32 and was yielding 5.85 percent, a loss of 3 basis points.

The shorter end of the interest-rate curve lagged, thanks to a host of new non-government securities to hit the market this week. A 5-year note was up a modest 4/32 at 6.15 percent. The 2-year was flat at 6.31 percent.

The difference in yield between a 10-year note and a 2-year note widened to a negative 27 basis points from a negative 25 basis points Wednesday. Still, the interest-rate curve has flattened in the 2-year through 10-year sector, largely a reflection of expectations for a slower economy going forward. The difference between the two issues had been as wide as negative 38 basis points a month ago.

The consensus forecast from our survey of economists puts the increase in the PPI in June at 0.5 percent, largely as oil spiked ahead of the announced production increase from OPEC. The core rate, which excludes food and energy prices, is expected to climb just 0.1 percent.

Oil prices could also impact the retail sales numbers, economists suggested. The consensus calls for a gain of 0.3 percent in retail sales in June with an identical gain in sales excluding autos.

The Treasury market is wary of any upside surprises in the key spending and inflation figures.

In order to cool demand, the Fed has raised rates six times since June 1999, but opted to let some of those hikes take hold in the economy before raising rates further. Accordingly, the Fed left its lending target at 6.5 percent when it met June 28.

Following last Friday’s benign jobs report, expectations of an August rate hike fell to 35 percent in the Fed funds futures market. But economists surveyed by MarketWatch.com are putting the odds at closer to 50 percent.

Elsewhere, some $16 billion of investment-grade corporate bonds and agency debt has been sold so far this week, with another $5 billion expected. Most new issues have carried 5-year or lower maturities.

Treasurys are often sold as a hedge against purchases of non-government paper such as corporate or mortgage-backed bonds.

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